The blame game continues in Italy as the FTSE MIB index fell another 1% yesterday. Despite the report from a couple of days ago that short selling volumes were insignificant, the Chairman of the Italian regulator Consob apparently asked stakeholders to recall any shares they had lent in Italian companies. Such a request from the head regulator must surely be respected and according to Reuters the Chairman of the association of Italian banking foundations denied any direct or indirect involvement by foundations in fuelling such speculative activity.
Why do I have a problem with this exchange?
- Is (covered) short selling legal in Italy? Yes.
- Are short selling volumes overwhelming and distorting the market? Not according to the only press report I have seen which specifically points out that the activity is low (perhaps surprisingly low).
- Have the regulators proposed to suspend short selling? Not that I am aware of, and why would they if volumes are insignificant compared to what must be a wave of selling by long investors.
- What kind of message is the regulator sending here? "Yes this is legal, but we don't want you to be doing it."
If there was a significant volume of short selling activity and the regulator intervenes through its request to a sector to recall shares on loan, this could in theory cause a "short squeeze" where short sellers are forced to quickly buy the shares to cover positions, often resulting in a dramatic market rise.
To my mind, a large, rapid, artificial movement in share prices not based on fundamentals or market news, whether up or down, looks a lot market manipulation. Which leads us to the inevitable question: Who regulates the regulator?